Commission is a part of salary when employee does what he expects for in service

Where assessee continued his employment with the firm, and was also given commission under Non-Compete Agreement ('NCA') for doing what he was normally expected to do (i.e. work for the said firm in his area of expertise), the commission amount clearly was part of salary

FACTS

• The assessee was a General Sales Agent (GSA) of Uzbekistan Airways (UA)-Uzind Corporation (UC) and received a salary of Rs. 1,32,000 p.a. By a non-compete agreement (NCA), the assessee received amount of 7% of the cargo freight and cost of tickets payable by UC to UA in addition to his regular salary.

• As per the NCA, the commission payable to the assessee was separate from the remuneration given to him for other services provided by him to UC. It further stipulated that the relationship was on principal-to-principal basis, not intended to be construed as either a partnership or agency.

• For AY 2003-2004, UC showed the non-compete fees as business expenditure and assessee was showing only a part of it (the amount actually received by him during each assessment year) as business income. The AO concluded that commission credited to the firm, UC was Rs. 8.47 crores, while the assessee had shown Rs.74 lakhs as business income, which was to be taxed as salary.

• The CIT(A) opined that by stating that there was no relationship of control or supervision over him, the assessee had admitted to being the de-facto owner of the firm. Thus entering into a non-compete agreement with a firm of which he was the de-facto owner was unnecessary and could be seen as measure to reduce the income of the firm. Therefore, he concluded that characterization of the amount as non-compete fees was an attempt to reduce the tax liability.

• The Tribunal reversed the findings of the CIT(A), holding that none of the lower authorities disputed that commission received was for carrying out any activity that was related to the business. Thus the amount could only be assessed under the head of income from business.

• Further, an arrangement where the source follows the mercantile system of accounting and the recipient follows the cash system is well recognized and followed, and was thus not a colourable device to evade taxes.

Case of the Revenue before High Court

• According to the revenue the non-compete fee was part of "salary" under sections 16 & 17 because the assessee had been paid salary by UC since its inception and the employer- employee relationship thus continued even after the non-compete agreement was entered into.

• It was further submitted that UC was nothing but a partnership firm of assessee's wife and daughter and the NCA was only entered into to camouflage this fact. The assessee had admitted to controlling the firm. It was emphasized that section 28(va) only taxes that amount of the income earned by the assessee for the condition for not carrying out any business of which already had an enterprise. It could not thus apply when the assessee does not have any other business.

Deciding the issue in favour of revenue i.e. the non-compete fee was part of "salary", the High Court held as under:

• In the instant case, the controversy which has emerged is whether the non-compete commission received by the assessee from UC amounted to business income, and not, as the revenue contends, salary income.

• The assessee has argued that he is the controller of the firm, which means the control needed to establish an employer-employee relationship is absent. However, if that is correct then he cannot claim receipt of Rs.1,32,000 as salary paid by the firm to him in his capacity as an employee. Consequently, all the amounts received by him should be income from business. However, that is not what he contends.

• Apart from this anomaly, another unexplained factor is why the assessee had to enter into a non-compete agreement with a firm that he controls. In any case, it would have been taxed under the head "income from business" under section 28 (va).

• UC was deducting the amount being paid under the non-compete agreement as business expenditure. However, under section 36(1)(iii), any amount paid as a bonus, or commission to be deductible, must only be made to employees.

• According to the SC decision in Shahzada Nand and Sons v. CIT [1977]108 ITR 358, the expressions "bonus" and "commissions" under this clause also include payments made under a contract. Thus, in this case it could be applied to the payments being made to the assessee under the NCA. What then follows is that if the deduction is to be allowed, the assessee must be an employee of UC. If this is so, then the amount received by him is taxable in his hands under the head 'income from salary'.

• The assessee failed to point out in what capacity he was given the money from the NCA. The assessee admittedly, did not have a business of his own, and was being treated as an employee for the purposes of the deductions. The relationship must then continue for the purposes of deciding whether the amount received under the NCA is his salary or not.

• The assessee continued to earn the non-compete commission in his capacity as an employee, to refrain from carrying on any business similar to that of UC. The assessee also continued his employment with the firm, and was given commission for doing what he was normally expected to do, i.e. work for the said firm in his area of expertise. He was given salary for that; in addition, he was also given commission for not competing with his employer, during his employment, in regard to the same line of business, in which he worked as an employee of the firm. Therefore, the commission amount clearly was part of salary answering the description under the inclusive definition under section 17.

• In view of the above , the question of law was to be answered in favour of the revenue. - [2012] 28 taxmann.com 28 (Delhi)